Loss Curve
A loss curve plots cumulative MCA portfolio losses by month-since-origination — visualizing the timing pattern of credit losses and enabling investors to project total losses for partially-seasoned vintages.
Why This Matters
Loss curve construction: x-axis is months since origination, y-axis is cumulative loss as percentage of original pool balance. MCA loss curves typically show steep initial accumulation (most defaults in first 6-9 months), then flatten as portfolios mature. Comparison across vintages reveals shifts in loss timing or magnitude. Capital markets investors use loss curves to project ultimate losses for unseasoned vintages by extrapolating from comparable seasoned vintage curves. Rating agency models depend on loss curve methodology for MCA securitization ratings.
Frequently Asked Questions
Frequently Asked Questions
What does a typical MCA loss curve look like?
Steep accumulation in months 0-6 (50-60% of total losses occur), continued accumulation months 7-12 (30-40% additional), flattening months 13-18 (residual 5-10%), plateau by month 18-24.
How are loss curves used in pricing decisions?
Funders price advances to achieve target loss-adjusted yields. Steeper-than-expected loss curves trigger pricing increases, underwriting tightening, or both. Flatter-than-expected curves enable competitive pricing or growth investment.